In response to various request from the crypto industry to clarify on how crypto assets should be regulated as well as the Cryptoasset Taskforce’s recommendation, the UK Financial Control Authority (FCA) issued a consultation paper on Wednesday.
Christopher Woodland, executive director of Strategy and Competition at the FCA said that although crypto assets is still small at this time, it is however growing rapidly. Hence, the UK government must clarify once and for all, which should be regulated and which shouldn’t be.
This is a small but growing market and we want both industry and consumers to be clear what is regulated, and what isn’t. This is vital if consumers are to know what protections they’ll benefit from and in ensuring we have a market functioning as it should, Woodland commented.
In issuing the guidance, the FCA hopes to help firms understand whether their crypto asset activities should be under FCA regulation. If the assets falls under FCA regulation, the firms will be able to comply and will benefit from appropriate consumer protection that the FCA has in place.
In the consultation paper, the FCA classifies crypto assets as either, specified investments, financial instruments or e-money which are under the Regulated Activities Order, Markets in Financial Instruments Directive II and E-Money Regulations respectively. All three classifications are regulated by FCA. So, if a firm deems that its crypto products and services fall under any of those, appropriate actions should be made to comply with the FCA regulation.
The consultation paper also includes some definitions of terms to further clarify the matter at hand. It defines crypto assets as:
cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically.
In addition, the FCA categorises crypto assets based on their intrinsic structure. These are exchange tokens, security tokens, and utility tokens. Exchange tokens include Bitcoin (BTC) and Litecoin (LTC) which are not recognised as legal tenders in the U.K. These crypto assets are not regulated by FCA since they use DLT platform and are not issued or backed by a central bank or other central authority.
The same goes true for utility tokens which can be redeemed for access to a specific product or service that is typically provided using a DLT platform and hence does not fall under FCA regulation.
While security tokens are classified as specified investments by definition of the Financial Services and Markets Act 2000. These are transferable securities and are likely to fall under FCA regulation.
The FCA will published the final guidance on regulating crypto assets by April 5, 2019.